US OIL

[Crush1884]

Technically the spot price (DFB) could become negative but you should set your own downside risk. If oil @ $0 is your maximum acceptable risk then set your stop at that.

The reality is a negative spot price is totally illogical, the spot price hit $7 today and quickly rallied out of that ridiculous valuation. 

Potential maximum price movements shouldn't really be considered, understand why you are placing your trade, know what rules will be hit for you to take profits and what rules will be hit (stop set) for you to take losses.

[22fdunst]

3 minutes ago, Crush1884 said:

Technically the spot price (DFB) could become negative but you should set your own downside risk. If oil @ $0 is your maximum acceptable risk then set your stop at that.

The reality is a negative spot price is totally illogical, the spot price hit $7 today and quickly rallied out of that ridiculous valuation. 

Potential maximum price movements shouldn't really be considered, understand why you are placing your trade, know what rules will be hit for you to take profits and what rules will be hit (stop set) for you to take losses.

Thanks Crush1884. It’s a long term hold for me... Happy to keep open until normality returns. I’m trying to ensure my position can’t be closed hence the question. I can cover a reduction in value to $0 but need to understand whether I should plan to cover a negative position beyond $0. 

[Crush1884]

3 minutes ago, 22fdunst said:

Thanks Crush1884. It’s a long term hold for me... Happy to keep open until normality returns. I’m trying to ensure my position can’t be closed hence the question. I can cover a reduction in value to $0 but need to understand whether I should plan to cover a negative position beyond $0. 

Sounds good but one word of caution. You will currently have quite high overnight hold costs. These are basically the costs you incur from IG for holding a long position in a commodity (oil). No point getting into the intricacies as to why but this is cost is real and when you login on the morning to check your trade you will see your balance is lower.

This makes holding commodities for the long term difficult whilst spread betting. There is a way of getting around this overnight cost as it is calculated at 10pm every night (when the Oil market temporarily closes). If you close you position at 9.59pm and re-open when the market re-opens you wont miss much price move and will avoid cost. However you will have to do this everyday and you will have to pay the spread on each trade.

This is why every good trade/system doesn't just look at buy and sell points but factors in costs for holding the position. The current overnight charge is high relative to normal levels because the difference between the June and July futures contract is extremely high because of the short term worry about demand. This is what calculates the overnight charge and as this normalises over time the overnight charge will reduce.

All head spinning for a newbie but important to consider nonetheless. Don't worry if there are anymore questions.

[MichaelT]

2 hours ago, Crush1884 said:

Sounds good but one word of caution. You will currently have quite high overnight hold costs. These are basically the costs you incur from IG for holding a long position in a commodity (oil). No point getting into the intricacies as to why but this is cost is real and when you login on the morning to check your trade you will see your balance is lower.

This makes holding commodities for the long term difficult whilst spread betting. There is a way of getting around this overnight cost as it is calculated at 10pm every night (when the Oil market temporarily closes). If you close you position at 9.59pm and re-open when the market re-opens you wont miss much price move and will avoid cost. However you will have to do this everyday and you will have to pay the spread on each trade.

This is why every good trade/system doesn't just look at buy and sell points but factors in costs for holding the position. The current overnight charge is high relative to normal levels because the difference between the June and July futures contract is extremely high because of the short term worry about demand. This is what calculates the overnight charge and as this normalises over time the overnight charge will reduce.

All head spinning for a newbie but important to consider nonetheless. Don't worry if there are anymore questions.

This is very useful information. Thanks for sharing.

Are you able to give an estimate of how much an overnight cost could be per £/pt?

What would be the best way to have a position on oil at these current historic lows to hold until it recovers?

[Caseynotes]

Could well be another turmultuous for oil, stay well clear unless speculating with small size, tight stop and set targets. Too many wild swings to be looking for a bottom yet.

Daily with weekly pivots and H1 with intraday levels;

[Caseynotes]

Google headlines for Oil ETF's;

Leveraged Oil ETF UCO Undergoing A 1:25 Reverse Split

www.thestreet.com › Home

 

1.  

17 hours ago - UCO's unleveraged counterpart, the United States Oil Fund (USO), is also looking at huge losses ahead. It's not at risk of a reverse split (yet), ...

 

Largest Oil Fund, USO, On The Brink Of Collapse - TheStreet

www.thestreet.com › Home

 

1.  

7 hours ago - Due to volatility in the crude oil market, USO has suffered huge losses and is ... the ProShares Ultra Bloomberg Crude Oil Fund (UCO) completed a 1:25 ... The $3 billion United States Oil ETF (USO) ran into its own problems.

 

Crude Oil Futures And ETFs Sink Tumble As Storage Is Limited

www.etftrends.com › leveraged-inverse-channel › crud...

 

1.  

2 days ago - ... lost fortunes as the funds have plummeted. USO is off more than 9% today, while UCO has lost over 11.5%. For more market trends, visit ETF ...

[Ddchart]

I’m currently short spot and long the July future, primarily to take the overnight funding credit on the short position. I realise it’s an imperfect hedge especially as the future gets closer to expiry (when I intend to roll it) so interesting to see how it plays out. You need to be sure you understand the relationship between the spot and far future price and the risk it involves; it obviously also isn’t going to work when the futures are in backwardation.

[Guest US OIL]

 The IG US CRUD price is a blend of the May and June front contracts so in answer to the question as to whether it could go to zero that's pretty unlikely as the longer you go through the month, the more back contract you have. This will roll to June/July soon when you have the economy starting to open up and some of the overhang will start to be taken up. Also you have to think everyone is working on a cheap solution to store piped West Texas crude right now..

[Fib550]

Morning. Can anyone tell me where the overnight funding is listed for spot wti? I cant find it anywhere, its well hidden! Im using the web version of the ig site, not prorealtime.

[Fib550]

1 hour ago, Ddchart said:

I’m currently short spot and long the July future, primarily to take the overnight funding credit on the short position. I realise it’s an imperfect hedge especially as the future gets closer to expiry (when I intend to roll it) so interesting to see how it plays out. You need to be sure you understand the relationship between the spot and far future price and the risk it involves; it obviously also isn’t going to work when the futures are in backwardation.

Would using a guaranteed stop instead of your futures hedge possibly acheive the same thing?

[Caseynotes]

13 minutes ago, Fib550 said:

Morning. Can anyone tell me where the overnight funding is listed for spot wti? I cant find it anywhere, its well hidden! Im using the web version of the ig site, not prorealtime.

Hi, there is an estimation of overnight funding for FX on the platform but not for commodities.

It would usually be worth running trades in the demo platform and checking the transaction history to get a rough idea of the of current levels debit or credit during normal times but with yesterday's range between 22 and 7 no one would want to take a guess but rather wait for the actual calc at 10pm. 

Edited April 22, 2020 by Caseynotes

[Fib550]

6 minutes ago, Caseynotes said:

Hi, there is an estimation of overnight funding for FX on the platform but not for commodities.

It would usually be worth running trades in the demo platform and checking the transaction history to get a rough idea of the of current levels debit or credit during normal times but with yesterday's range between 22 and 7 no one would want to take a guess but rather wait for the actual calc at 10pm. 

Thankyou ! So if I planned to take advantage picking up overnight funding by holding a short with a guaranteed stop just before close I wouldnt be able to check the rate, and the best way of getting an idea of the rate is by looking at it on the demo?

Edited April 22, 2020 by Fib550

[Caseynotes]

7 minutes ago, Fib550 said:

Thankyou ! So if I planned to take advantage picking up overnight funding by holding a short with a guaranteed stop just before close I wouldnt be able to check the rate, and the best way of getting an idea of the rate is by looking at it on the demo?

correct, to get the calculated amount you need the close price and who would try to guess what that might be before the actual close, especially on a day like yesterday.

Edited April 22, 2020 by Caseynotes

[Ddchart]

14 minutes ago, Fib550 said:

Would using a guaranteed stop instead of your futures hedge possibly acheive the same thing?

I don’t think it would - the key thing here is I’m trying to reduce exposure to the delta as much as possible whilst capturing the fact you currently get paid to be short spot oil. Because you’d expect far futures prices to be less volatile than the spot, I *think* in the current environment that you can also capture some delta on this trade, ie. yesterday spot dived lower than the July future meaning my short made more than my long, and I was paid the funding credit. At the moment I can’t see spot prices trading above the far future so this could be a way to gain exposure without paying any funding costs. With a guaranteed stop on a long you’ll still pay funding - yesterday I received £30 funding credit so you’d be paying more than that to be long. I don’t see just going long spot oil long term as viable at the moment; appreciate the funding costs change but even if it’s costing you £20 a day to be long, that’s £7,300 per year on a one point contract. Oil would have to be up above 90 a barrel within a year for you to make any money.

[Ddchart]

26 minutes ago, Fib550 said:

Would using a guaranteed stop instead of your futures hedge possibly acheive the same thing?

Actually I think I mis-interpreted your question slightly. The issue with an unhedged short is where are you going to put your stop when the market’s this volatile? Yesterday the spot priced moved over 800 points, if that goes against you and your stop gets triggered you’ll lose way more than you’ll gain from the funding. The reason I use the long future is that you don’t pay funding on futures.

[Fib550]

3 minutes ago, Ddchart said:

I don’t think it would - the key thing here is I’m trying to reduce exposure to the delta as much as possible whilst capturing the fact you currently get paid to be short spot oil. Because you’d expect far futures prices to be less volatile than the spot, I *think* in the current environment that you can also capture some delta on this trade, ie. yesterday spot dived lower than the July future meaning my short made more than my long, and I was paid the funding credit. At the moment I can’t see spot prices trading above the far future so this could be a way to gain exposure without paying any funding costs. With a guaranteed stop on a long you’ll still pay funding - yesterday I received £30 funding credit so you’d be paying more than that to be long. I don’t see just going long spot oil long term as viable at the moment; appreciate the funding costs change but even if it’s costing you £20 a day to be long, that’s £7,300 per year on a one point contract. Oil would have to be up above 90 a barrel within a year for you to make any money.

Thankyou, really insighful to your thinking and given me a lot to think about.
When I was referring to the guaranteed stop, I was meaning on a short, so you take a short, pick up the overnight funding, if price jumps on the reopen your stopped at your guaranteed stop. As long as the loss on your short is lower than the overnight funding you picked up that should mean an overall positive return, unless im missing something

[Fib550]

4 minutes ago, Ddchart said:

Actually I think I mis-interpreted your question slightly. The issue with an unhedged short is where are you going to put your stop when the market’s this volatile? Yesterday the spot priced moved over 800 points, if that goes against you and your stop gets triggered you’ll lose way more than you’ll gain from the funding. The reason I use the long future is that you don’t pay funding on futures.

That answers my question, thanks!

[CharlotteIG]

With oil prices on some data providers crashing into the negative, you’ve probably noticed that oil prices on IG’s trading platform haven’t (thus far), and that has to do with how prices are extracted. To put things into context, it was the infamous May contract (which has now expired) that went into negative territory, but given how oil prices are extracted, spot oil prices on IG’s trading platform didn’t go anywhere below $0 (or even below $20 at the time) when the rollover mayhem occurred in the oil futures market.

So how exactly does IG price its spot oil?

Two futures contracts are used to price our spot price, and that’s a combination of the nearest (or front month) contract to the next, further (back month) contract, essentially moving towards the further contract as time progresses.

The May contract went negative at the very end prior to settlement, and at the start IG’s spot oil price is much closer to the June price than the July price, explaining the similarity between the platform’s price and the June contract compared to the higher priced July contract. Expect the platform’s price to reflect less of the June contract and more of the July contract as time progresses.

That makes oil prices on the platform different from that seen on other platforms, and has resulted in oil prices on IG’s platform avoiding Monday’s carnage that may have been witnessed on other platforms. In fact, if other data or trading platforms incorporate the cost-of-carry, then you might have seen prices below that of the front month contract.

Can IG’s oil prices go negative?

Absolutely, but here we need to look at the different contracts on the platform.

If it’s our futures contracts (June and July are presently available), then should the underlying contract go into negative, then that would translate into negative prices on our platform for that specific product that tracks the underlying that went negative. In other words, if June goes negative, you would see that on the platform, same holds true for July, and if both went negative you would see negative prices on both futures contracts on the trading platform.

As for spot (or undated contracts), as explained previously its based on the front and back month, and that means negative oil prices can’t be ruled out, as should the current June and/or July oil contracts go negative, and that would translate into negative prices on our platform as well, especially if the June contract plummets more when the price bias from the contract is higher earlier on, and will be less of a factor as time progresses and the spot contract’s price takes a heavier weight from the back month July contract.

Trading when the product goes negative and calculating margins

If you have an open position and oil prices do go negative on the June contract for example, you can still close that position (at the very least, close-only will be available should prices go negative). In terms of calculating margins, it is calculated as the higher of (1) 5%, or (2) 80 points times the positions.

For example, if you have one contract on US Crude Oil, then the result at a price of 1394.4 would be calculated as such (1) 10 x 1394.4 x 5% = $697.20, and (2) 80 x $10 = $800. The higher value in this example is $800, which would be the margin in this example, as well as for any price below and into negative territory. Should oil prices recover to a price of $1601 and above, then margins would be calculated using the first method.

Overnight funding

Given the difference in pricing the undated contracts for commodities, the overnight funding model will also differ. Here it’s based on two parts:

Admin Charge: This is a charge to the client and is 2.5% of the notional value of the trade annually, and hence is calculated by taking the price (for example) 1 x $10 (1394.4 x 2.5% / 365) = $0.93.

Basis Adjustment: This is an adjustment and not a charge, and can be positive or negative depending on the difference between the front and back month contracts. The basis equates the daily movement of our undated price along the futures curve, and depends on the difference between the two. Because the undated contract is in constant motion moving closer to the next month and away from the front month, the pricing model makes the adjustment accordingly. The adjustment is made by the following formula:

(Price of the next future – price of the front future) / (Expiry of the front future – expiry of the previous front future)

Contango is the normal state of the futures market, where the next contract is pricier than the current contract and so on. However, in the current coronavirus storm we’ve been seeing an extreme case of contango where current prices on a lack of demand (and dwindling storage capabilities) have been plummeting but where prices in the next contract are much higher anticipating output cuts and an ease in lockdown restrictions. That has meant that the Basis Adjustment has been higher as the ‘Price of the next future – price of the front future’ has grown to massive proportions.

Should backwardation occur where the next futures contract price is lower than the front month, and that would translate into clients receiving a basis adjustment as time progresses instead of the current scenario where the basis adjustment has been significantly higher.

[Crush1884]

1 hour ago, CharlotteIG said:

Expect the platform’s price to reflect less of the June contract and more of the July contract as time progresses.

Thanks Charlotte. Just for clarification on the statement above could you possibly answer a few questions.

Firstly currently the June contract is at $11.48 and July contract at $20.22 and the spot price is $12.24. I would be interested to know the exact calculation to devise the spot price. 'As time progress' is a very global term and I think its important to categorise how time (number of days) between contracts factors into the overall spot price calculation.

My main point is if in 2 weeks time the June contract is still $11.48 and the July contract is still $20.22 do you already know what the spot price would be?

[Caseynotes]

Oil continuing it's creep back up towards the weekly S3.

Daily chart;

[Ddchart]

I can’t fathom this rally as anything other than short covering/relief rally. There was no positive news yesterday that would have caused the price spike and the underlying factors that caused the May contract to trade negative are still present and are worsening as time goes on. 

[Caseynotes]

4 minutes ago, Ddchart said:

I can’t fathom this rally as anything other than short covering/relief rally. There was no positive news yesterday that would have caused the price spike and the underlying factors that caused the May contract to trade negative are still present and are worsening as time goes on. 

there was a serious immediate problem with oil storage and speculative longs panicked and rushed for the exit. Coming out of the flu crisis demand for oil will increase rapidly so it's a case of finding a stable bottom until it does.

[Crush1884]

50 minutes ago, Ddchart said:

I can’t fathom this rally as anything other than short covering/relief rally. There was no positive news yesterday that would have caused the price spike and the underlying factors that caused the May contract to trade negative are still present and are worsening as time goes on. 

I disagree, the price moved back far too much. If you adjust for inflation when the spot price hit $7 on Tuesday it was 30% less than the lowest price recorded in history going back to 1860.

The price was always going to rebound from there unless the need for oil was going to become redundant - which it obviously isn't. It just got traded down and significantly overstretched at that price - possibly the rebound is too much as well but who knows?

[Caseynotes]

😳😳

[Level_Trader]

3 hours ago, Caseynotes said:

Oil continuing it's creep back up towards the weekly S3.

Reports that Trump has instructed the U.S. Navy to fire on any Iranian ships that harass it in the Gulf is what is allegedly driving the rally.

Low oil prices are here to stay IMO. Until OPEC + themselves go into lock down and turn off production we're unlikely to see a substantial recovery..

[Caseynotes]

2 minutes ago, Level_Trader said:

Reports that Trump has instructed the U.S. Navy to fire on any Iranian ships that harass it in the Gulf is what is allegedly driving the rally.

Low oil prices are here to stay IMO. Until OPEC + themselves go into lock down and turn off production we're unlikely to see a substantial recovery..

yes, OPEC (+ Russia) politics remain very confused, absolutely no unity in setting production levels. 

[Caseynotes]

FXCM client long/short sentiment over the last month showing the collapse of longs but no major activation of shorts.

 

[dmedin]

On 22/04/2020 at 10:24, CharlotteIG said:

With oil prices on some data providers crashing into the negative, you’ve probably noticed that oil prices on IG’s trading platform haven’t (thus far), and that has to do with how prices are extracted. To put things into context, it was the infamous May contract (which has now expired) that went into negative territory, but given how oil prices are extracted, spot oil prices on IG’s trading platform didn’t go anywhere below $0 (or even below $20 at the time) when the rollover mayhem occurred in the oil futures market.

So how exactly does IG price its spot oil?

Two futures contracts are used to price our spot price, and that’s a combination of the nearest (or front month) contract to the next, further (back month) contract, essentially moving towards the further contract as time progresses.

The May contract went negative at the very end prior to settlement, and at the start IG’s spot oil price is much closer to the June price than the July price, explaining the similarity between the platform’s price and the June contract compared to the higher priced July contract. Expect the platform’s price to reflect less of the June contract and more of the July contract as time progresses.

That makes oil prices on the platform different from that seen on other platforms, and has resulted in oil prices on IG’s platform avoiding Monday’s carnage that may have been witnessed on other platforms. In fact, if other data or trading platforms incorporate the cost-of-carry, then you might have seen prices below that of the front month contract.

Can IG’s oil prices go negative?

Absolutely, but here we need to look at the different contracts on the platform.

If it’s our futures contracts (June and July are presently available), then should the underlying contract go into negative, then that would translate into negative prices on our platform for that specific product that tracks the underlying that went negative. In other words, if June goes negative, you would see that on the platform, same holds true for July, and if both went negative you would see negative prices on both futures contracts on the trading platform.

As for spot (or undated contracts), as explained previously its based on the front and back month, and that means negative oil prices can’t be ruled out, as should the current June and/or July oil contracts go negative, and that would translate into negative prices on our platform as well, especially if the June contract plummets more when the price bias from the contract is higher earlier on, and will be less of a factor as time progresses and the spot contract’s price takes a heavier weight from the back month July contract.

Trading when the product goes negative and calculating margins

If you have an open position and oil prices do go negative on the June contract for example, you can still close that position (at the very least, close-only will be available should prices go negative). In terms of calculating margins, it is calculated as the higher of (1) 5%, or (2) 80 points times the positions.

For example, if you have one contract on US Crude Oil, then the result at a price of 1394.4 would be calculated as such (1) 10 x 1394.4 x 5% = $697.20, and (2) 80 x $10 = $800. The higher value in this example is $800, which would be the margin in this example, as well as for any price below and into negative territory. Should oil prices recover to a price of $1601 and above, then margins would be calculated using the first method.

Overnight funding

Given the difference in pricing the undated contracts for commodities, the overnight funding model will also differ. Here it’s based on two parts:

Admin Charge: This is a charge to the client and is 2.5% of the notional value of the trade annually, and hence is calculated by taking the price (for example) 1 x $10 (1394.4 x 2.5% / 365) = $0.93.

Basis Adjustment: This is an adjustment and not a charge, and can be positive or negative depending on the difference between the front and back month contracts. The basis equates the daily movement of our undated price along the futures curve, and depends on the difference between the two. Because the undated contract is in constant motion moving closer to the next month and away from the front month, the pricing model makes the adjustment accordingly. The adjustment is made by the following formula:

(Price of the next future – price of the front future) / (Expiry of the front future – expiry of the previous front future)

Contango is the normal state of the futures market, where the next contract is pricier than the current contract and so on. However, in the current coronavirus storm we’ve been seeing an extreme case of contango where current prices on a lack of demand (and dwindling storage capabilities) have been plummeting but where prices in the next contract are much higher anticipating output cuts and an ease in lockdown restrictions. That has meant that the Basis Adjustment has been higher as the ‘Price of the next future – price of the front future’ has grown to massive proportions.

Should backwardation occur where the next futures contract price is lower than the front month, and that would translate into clients receiving a basis adjustment as time progresses instead of the current scenario where the basis adjustment has been significantly higher.

 

PhD on oil economics required...

[dmedin]

Just now, Caseynotes said:

FXCM client long/short sentiment over the last month showing the collapse of longs but no major activation of shorts.

 

 

Maybe they haven't got any money left, what with being wrong most of the time and all.

[DavidUK84]

Just had this message.

"We’re increasing our initial margin requirement for Brent and US Crude. This is due to the recent price action of oil.
Our starting margin rate will be the larger of 80 points multiplied by your trade size or 5% of the notional value of your trade, based on the opening level. This rate is already in effect for new positions opened now, and will apply to any existing positions and working orders from 4pm (UK time) on Friday 24 April 2020."

Could some kind soul please explain to me what this actually means in practice? If I have a £1 a point position on say July WTI, how much additional margin am I actually going to need by 4pm tomorrow?

Thank you.

Edited April 23, 2020 by DavidUK84